It’s an issue encountered by contract lawyers on an almost daily basis (well, this contract lawyer anyway). The all-too-familiar tale almost always starts with a person recounting how they’ve fallen out with their supplier, contractor or business partner, and asking what they can do. That's inevitably followed by "Oh, and we don’t have a written contract.”
In many cases, getting written contracts in place is often comparable to unpacking that final box when you’ve moved house. You’ll get round to those finishing touches to the spare bedroom at some point, just not today…
And it’s understandable. All new companies have to consider a multitude of different elements to their business: investment, personnel, development, sales and marketing. Contracts can be expensive, especially if multiple contracts are required; they are to be negotiated and are particularly complex. Often, the time and resources to deal with these important contractual matters are simply not available and they are put to one side, to be dealt with at a later date.
In many cases, a written contract will never actually be dusted down and scrutinised after signature. So is a verbal contract worth the paper it’s not written on?
In England, a contract, whether verbal or written, must follow some basic principles in order to be formed:
- There must be an offer by a party to enter into a contract on certain, specific terms.
- The offer must be accepted – with no variation of the terms of the offer – and then communicated (although certain actions can be considered acceptance). If there is a variation, then this becomes a counter offer, which itself must be accepted.
- There must (in most cases) be consideration, so something in exchange for what is being offered.
- There must be an intention to create legal relations. Without intention, there cannot be a contract.
Distinction - This is in contrast to an “invitation to treat”, which web companies have become particularly grateful for when, for example, offering television sets for £2.99 instead of £299! A product appearing on a website only amounts as an “invitation to treat” rather than an offer.
As mentioned above, certainty of terms is crucial to establishing a binding contract (whether it is verbal, written, or partly verbal and partly written). However, this requirement of certainty is where verbal contracts invariable encounter difficulties when a dispute between the parties has arisen, since those terms are very difficult to ascertain. It’s difficult, but not impossible.
In these circumstances, should a dispute ever reach the courts, the actions and the statements made by both parties would have to be examined in order to establish what was actually agreed. This could extend to looking at correspondence, (e-mails, letters etc) quotes and order forms between the parties to determine the terms. The parties’ actions after a verbal contract is formed can also be examined by the court, to assist in establishing the full extent of the terms agreed. In the event that none of the above is available, the dispute can inevitably become one party’s word against the other, which could turn on an individual’s character and credibility.
That is not to say that a written contract will always be clearer than a verbal contract. A poorly drafted contract can often present as many difficulties in relation to ambiguity and certainty as a verbal contract can. Problems can also arise when there is a written contract, but for some reason, one or neither party has signed it. Businesses should be aware of the risk posed by beginning to perform their part of a contract before signature and the risk of an inference being made that the contract has been formed, despite the lack of signature.
The aim of a well-drafted written contract is to minimise risk (besides keeping contractual lawyers in employment!). It looks to reduce the risk of ambiguity and ought to clearly set out each party’s rights and obligations. In turn, this hopefully minimises the risk of a dispute with the other party by being able to clearly identify express terms in the contract, and lowers the risk of that dispute escalating to dispute resolutions centres and litigation. Although the initial expenditure incurred in generating a written contract can be high, particularly for start ups, this is often insignificant when compared to the amount parties could be exposed to when disputing contract terms.
I think it might be time to finish off that spare bedroom...
Jean-Marc Pettigrew is a solicitor at Waterfront solicitors